VAT claims blocked
VAT that you pay on goods and services you buy for your business can usually be reclaimed as long as they will be used to make VATable supplies. However, VAT paid on business entertainment costs is specifically blocked by the rules. There are two exceptions:
- staff entertainment; and
- entertaining overseas customers (see The next step ).
We’ll concentrate on the latter in this article.
The rules say that business entertainment means hospitality of any kind. The most obvious forms of hospitality are wining and dining customers, suppliers etc., but it can also cover a wide range of other situations. For example, providing:
- accommodation, e.g. hotel rooms
- theater and concert tickets
- access to sporting events and facilities; and
- using yachts and aircraft to entertain.
Entertaining Overseas Customers
At one time claims to recover VAT on the cost of entertaining overseas customers were allowed, but in 1988 HMRC blocked all future claims. Then in 2010 the European Court of Justice ruled that HMRC was out of step with EU law and it should once more allow claims. HMRC had other ideas and while claims are permitted there can be other VAT consequences.
When can you make a claim?
HMRC says that while VAT paid on the entertainment of overseas customers can be reclaimed, there won’t be a net saving for businesses unless the claim is reasonable. Its view is that entertainment which isn’t of a reasonable scale has a secondary function, which is to provide a personal perk to the recipient. Providing a perk is a supply of goods or services and so VAT must be accounted for on their value. In effect this cancels out part or all of the VAT you reclaimed.
Example. Refreshments, such as sandwiches and soft drinks, are probably essential to the smooth running of a business meeting lasting several hours and therefore the VAT on the cost of providing these, even if that means using an outside caterer or going out for it, can be reclaimed. However, a three-course meal with a nice bottle of wine or two is not necessary for the purpose of the meeting and is really a perk on which VAT must be accounted for.
Tip. Notwithstanding the above, you can reclaim the VAT on the costs incurred for yourself, or your employees, if your attendance is essential in the course of entertaining foreign customers. For example, as the host of a business meeting held at a restaurant.
Where entertaining foreign customers doesn’t meet HMRC’s definition of reasonable, rather than reclaim VAT and then have to account for it, HMRC is happy for you shortcut the procedure by simply not reclaiming the VAT in the first place